1

NATIONAL CONFERENCE ON FINANCE AND ECONOMICS 2016

Jaipuria Institute of Management Lucknow, India

SONJAI KUMAR, Vice President- Business RiskAviva India Life Insurance

Disclaimer: Views expressed in this presentation are mine and not necessarily of my employer

December 9-10, 2016

2

AGENDA

1. Purpose of Conference2. Relationship Between Economy and

Insurance Sector3. How does international risks may impact

Indian Economy and Insurance Sector

3

PURPOSE OF THE CONFERENCE

Promote research and development in the field of Economics and Financial domain.

Bring together researchers, practitioners, policymakers on the same platform on the issues related to economics and finance

4

FINANCE AND ECONOMICS Close inter-dependence between economy and

financial domain

Very apt topic for the for research to identify the key dependencies of economic parameters on financial institutions help creating fore-warning system to take proactive action in managing the emerging risks

2008 economic crisis suggests a close linkages between financial institution and economy, Post crisis economic situation reflects led to severe recession completing the circular loop of dependencies

5

RELATIONSHIP OF ECONOMIC PARAMETER AND INSURANCE SECTOR

Macro Economic Parameters

Insurance Sector

Improves Employment

Generates income

Growth in GDP

Increase Domestic Savings

Increase Disposable Income

Capacity to pay Premium

Customer

6

RELATIONSHIP OF ECONOMIC ACTIVITY AND INSURANCE SECTOR

Macro Economic Parameters

Insurance Sector

Growth in GDPIncrease Disposable Income

Capacity to pay Premium

Support Capital Market

FDI increases more insurance players and so more money into capital market

Generate long term investible fund and improve GDP

Customer

7

DEMONETIZATION- ECONOMIC IMPACT

Short Term: • Fall in Demand, leading to adverse impact on GDP• Job Market- Retail sector, Consumer goods, Real Estate etc• Fall in interest rate, trend started ( BoB and BOI 5 bps-

20bps)• 2017 Budget would critical for growth trajectory of

economyMedium Term:• Depend on what trajectory the Country takes post budget • If fiscal deficit remain controlled together with increased

liquidity, interest rates will further come down• This will push the investment leading to positive impact

on equity market• Otherwise, sustained low demand, Stagnant interest rate,

Job market adversely impactedLong Term: • More revenue to Government and positive impact

through taxes- more disposable income• Increase in volume of business due to Cash less

transactions,• More stable inflation within band of 4% plus/minus 2%• Lower interest rate depending on how inflation behaves

8

IMPACT OF ECONOMIC AND DEMOGRAPHIC FACTORS ON INSURANCE SECTOR

Macro Economic Factors

Insurance Sector

Interest Rate

Inflation

Equity Market

New Business

Profit

Low interest rates increases the cost of guarantees

Impacts cost of productsIncrease in Expenses of the

Up movement in Equity market moves customers away from Insurance to other investment opportunities

Persistency

Business Impact

Increase in inflation rate negatively correlated with Premium income decreasing persistency

Increase in interest rate negatively correlated with increase in Premium income

9

SHORT TERM IMPACT ON INSURANCE SECTOR Business Impact

•New Business Premium may go down due to the cautious approach of new customers•Persistency may decrease as policyholder may like to hold cash in account•Overall premium growth in 2017 may go down

Risks to insurance companies in view of low interest•Par products Managing bonuses in line with PRE•Meeting Guarantees under non-par•Reinvestment risk•Future premium invested at lower rate

Shareholders impact•Impact shareholder’s profit, low interest rate- higher reserves- impact on margins•Re-pricing is an option, may make product unattractive losing new business

10

MEDIUM TO LONG TERM IMPACT

Business Impact•New product design in view of low interest rate, may be moving more towards protection business•New modes of distribution coming up such as mobile and more online products•With more economic activity, buoyant equity market may re-infuse ULIP products

Risk Management•Managing through re-pricing of products•Companies moving away from guaranteed product•Increasing efficiency to extract margins•Low cost distribution model through mobile/internet

Shareholders impact•Margins continues to be challenge , extracting profit from efficiency and expense rationalization

11

IMPACT OF GLOBAL RISKS ON INDIAN LIFE INSURANCE COMPANIES

12

TOP FIVE GLOBAL RISKS

RisksRisk Category Likelihood Impact

Geo-political

Interstate conflict with regional consequences

Weapons of mass destruction

Failure of national governance Interstate conflict with

regional consequencesState collapse or crisis

Environmental Extreme weather eventsFailure of climate-changeadaptation

EconomicHigh structural unemployment or underemployment

 

Societal  Water crisesRapid and massive spread of infectious diseases

The top five global risks (Economic, Environmental, Geopolitical, Societal and Technological) exposure are highlighted by World Economic Forum (“WEF”) every year since 2007

No Technological risks have been identified during 2015

13

IMPACT ON INDIAN ECONOMY THROUGH GEOPOLITICAL RISKS

Decrease in exports impacting GDP Crash of equity market Increase in inflation Impact on interest rate Polarization of world political landscape impacting

entire economy and development of the country

14

IMPACT ON INSURANCE INDUSTRY Reduction in New Business Premium Higher/Mass surrenders Lower capital generation affecting expansion Interest rate risk leading to mismatch between

assets and liability Very high claims if weapon of mass destruction is

used Liquidity drying up Defaults in corporate Bonds due to unable to

manage sustainable growth Reinsurance default due to impact in the global

market/parent country

15

RISK MANAGEMENT Assess the risks applying sever stress test on

following risks parameter to assess capital resources required to meet liabilities: Lapses Interest rate Inflation Liquidity Mortality

Plan the management action to meet the crisis arising from results of stress tests

Monitor the emerging risks and report to the Board on emergence of any early warning indicators

16

IMPACT ON INDIAN ECONOMY THROUGH ENVIRONMENTAL RISKS

Environmental risk is expected to arise from extreme weather condition, failure to adapt to the climate change, natural catastrophe, biodiversity loss & ecosystem collapse and manmade environmental catastrophe.

Impact on India, as the country is still dependent on the monsoon rain, any extreme weather condition likely to impact on the ability to grow food leading into dependence on buffer food stock resulting into immediate increase in inflation and affecting interest rate.

Catastrophe event likely to increase both death and sickness claims. Environmental risk may increase following key risks for the insurance companies

Inflation and interest rate Mortality and Morbidity The risk assessment for this risk can be performed through stressing

economic and demographic risk factors together to assess worst possible scenario. To manage risk action plan may be drafted to take preventive measures should event unfold.

17

IMPACT ON INDIAN ECONOMY THROUGH GLOBAL ECONOMIC RISKS

Key risks : unemployment and underemployment, Fiscal crisis, asset bubble, failure of financial mechanism or institution, energy price shock, deflation, failure of critical infrastructure and unmanageable inflation as key risk events.Impacting insurance industry through slide in equity market, interest rate movement (both up and down) and increase in inflation.

18

IMPACT ON INDIAN ECONOMY THROUGH SOCIETAL RISKS

Key risks under this category Spread of infectious disease leading to pandemic both at

country level and at international level. Ebola virus; in the past spread of H1NI virus have been

seen. Spread of such virus cannot be ruled out leading to large

number of morbidity and mortality claims. For such event large stress test on mortality or

morbidity in the range of 200% to 300% of base mortality/morbidity assumption.

Management action Monitoring

19

THANKS

20

GDP GROWTH RATE

21

INSURANCE PENETRATIONNot enough compared to developed countries which is around 10%

22

INSURANCE DENSITY

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

10

20

30

40

50

60

70

11.514.716.419.722.7

38.446.647.4

54.3

64.459

53.2 52 55

Insurance Density (USD)

23

INCREASE IN EMPLOYMENT- EMPLOYEES AND AGENTS , FIGS IN LACS

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160.0

5.0

10.0

15.0

20.0

25.0

30.0

1.5 1.9 2.5 2.9 3.0 3.4 2.5 2.5 2.4 2.5 2.5

14

20

25

29 30

27

23.421.2 21.6

20.4320.16

No. of Employees No. of Agents

24

PREMIUM INCOME

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1st Yr Premium Existing Business Total Premium

11%9%

11%11

%14%

14%

15%

17%

12%

10%7%

4%2%1%

% indicates Share of Private Sector

Cr

25

GROSS DOMESTIC SAVINGS AS A % OF GDP

Definition of 'Gross Domestic Saving' Definition: Gross Domestic Saving is GDP minus final consumption expenditure. Gross Domestic Saving consists of savings of household sector, private corporate sector and public sector.

26

DISPOSABLE INCOMEDisposable Personal Income in India increased to 138192890 INR Million in 2015 from 127880080 INR Million in 2014

27

FDI IN INDIAFDI in India increased by 1547 USD Million in May of 2016. FDI in India averaged 1153.89 USD Million from 1995 until 2016, reaching an all time high of 5670 USD Million in February of 2008 and a record low of -60 USD Million in February of 2014.

28

ASSETS INVESTMENTS (CR)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

Equity (Market Value) Fixed Income (Book Value)